Lesso Group expects consolidation in China's plastic pipe sector

Signs of a more difficult market for plastic pipe in China have not apparently caused major problems for pipe maker Lesso Group Holdings Ltd., which reported that sales in the first half of the year rose 18 percent to 5.692 billion yuan ($929.2 million) and profits rose 13 percent to 678 million yuan ($110.7 million).

Lesso, which changed its English name from Liansu earlier this year, said it was pushing ahead with a new pipe plant in Hainan Province, its 15th nationwide, as part of 1 billion yuan ($163.2 million) in capital investment this year. It plans to open a facility in Yunnan Province next year.

The company, China’s largest plastic pipe maker, said demand for plastic pipe remained steady as the country’s urbanization continued.

But it noted worrying trends such as more price pressure in PVC pipe markets, general economic belt-tightening in China and concerns over the “deterioration” of local government debt that could pinch its property and infrastructure markets.

“Although there was a complex, volatile and challenging macro environment, the Group’s business environment of plastic pipe in the first half of 2013 seemed to be less strenuous than the same period last year,” it said. “Demand for plastic pipe remained steady during the review period, as infrastructure activities and sales of residential properties in China continued to be stable.”

However, Foshan -based Lesso mentioned several times in its Aug. 19 report to the Hong Kong Stock Exchange that it expects the difficult economic situation to “further intensify the consolidation of the plastic pipes and pipe fittings industry.”

It said it believed it has advantages as the sector consolidates because of its large size and focus on expanding its sales network.

China’s plastic pipe industry last year saw its slowest growth in five years, although it still saw pipe production rise 10 percent, to 11 million metric tons, according to figures from the Beijing-based China Plastics Piping Association.

Lesso said it was responding with a more stringent credit policy to distributors, demanding payment in advance or on delivery for everyone except the most well-established firms.

“In the wake of the deceleration in China’s economic activities, the Group has been proactively pursuing the strategy of economies of scale and expanding [its] sales network in a bid to drive both turnover and profit growth,” it said. “The management expects this strategy to further precipitate industry consolidation.”

The company said its volume of pipe sold rose 18.3 percent in the first half of the year, to 556,000 metric tons, with PVC pipe accounting for 439,000 metric tons. It said the average selling price for its PVC pipe dropped 3.3 percent, to 8,032 yuan ($1,311.19) per ton, while the price of non-PVC pipe rose 0.9 percent, to 15,786 yuan ($2,576.99) per ton.

The company also disclosed that it paid $136 million yuan ($22.2 million) in April to acquire Fengyang Chiao Yue New Construction Material Co., Ltd., a maker of calcium silicate board, which it called an environmental building material. It renamed the company Anhui Lesso Chiao Yue New Construction Material Co., Ltd.

Lesso in recent years has announced investments in new lines of business outside of plastic pipe, mainly in other building products, but those efforts have yet to become a significant part of its sales.